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EARTHLINK INC
FORM 10-K
(Annual Report)
Filed 02/20/13 for the Period Ending 12/31/12
Address 1375 PEACHTREE STREET
SUITE 400
ATLANTA, GA 30309
Telephone 4048150770
CIK 0001102541
Symbol ELNK
SIC Code 7370 - Computer Programming, Data Processing, And
Industry Computer Services
Sector Technology
Fiscal Year 12/31
http://www.edgar-online.com
© Copyright 2013, EDGAR Online, Inc. All Rights Reserved.
Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.

Table of contents

  • Page 1
    EARTHLINK INC FORM 10-K (Annual Report) Filed 02/20/13 for the Period Ending 12/31/12 Address 1375 PEACHTREE STREET SUITE 400 ATLANTA, GA 30309 4048150770 0001102541 ELNK 7370 - Computer Programming, Data Processing, And Computer Services Technology 12/31 Telephone CIK Symbol SIC Code Industry ...

  • Page 2
    ... (State or other jurisdiction of incorporation or organization) 58-2511877 (I.R.S. Employer Identification No.) 1375 Peachtree St., Atlanta, Georgia 30309 (Address of principal executive offices) (Zip Code) (404) 815-0770 (Registrant's telephone number, including area code) _____ Securities...

  • Page 3

  • Page 4
    ... with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information Part III Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and...

  • Page 5
    SIGNATURES 114

  • Page 6
    ... additional data centers and launch a next generation cloud hosting platform. Our corporate offices are located at 1375 Peachtree St., Atlanta, Georgia 30309, and our telephone number at that location is (404) 8150770. Our website address is www.earthlink.net. Business Strategy Our business strategy...

  • Page 7
    ... of ITC^DeltaCom, Inc. ("ITC^DeltaCom"), a provider of integrated communications services to customers in the southeastern United States. In March 2011, we acquired Saturn Telecommunication Services Inc. and affiliates ("STS Telecom"), a privately-held provider of sophisticated Voice-over-Internet...

  • Page 8
    ... customers, including local, domestic and international switched access, dedicated long distance services, hosted voice solutions and access trunks for customers that own and operate switching equipment on their own premises. We offer a full range of access types, including traditional voice lines...

  • Page 9
    ... through compensation programs that reward our sales and account management staff based on customer retention. Network Infrastructure We provide secure, efficient and reliable communications services primarily through an expansive fiber optic network, an advanced nationwide MPLS network and switch...

  • Page 10
    ...located communications equipment within the central offices of ILECs and alternative access providers in various markets in the United States, we offer remote facilities-based local and long distance services in markets by using our switches in other locations as hosts. Using our fiber optic network...

  • Page 11
    ...call centers, search engine marketing, affinity marketing partners, resellers and marketing alliances such as our relationships with Time Warner Cable and Dish Network. Customer Service and Retention Our customer support is available by chat and phone as well as through help sites and Internet guide...

  • Page 12
    ... , Verizon and Windstream; cable companies providing broadband access, including Charter Communications, Inc., Comcast, Cox Communications, Inc. and Time Warner Cable; local and regional ISPs; established online services companies, such as AOL and the Microsoft Network; free or value-priced ISPs...

  • Page 13
    ... the Unbundled Network Element-Platform, or UNE-P, to provide local services to customers at TELRIC-based rates. In some circumstances, AT&T, Verizon and other incumbent carriers are making available some of these facilities and services, either as lightly regulated special access services or under...

  • Page 14
    ...has classified cable modem services offered by cable companies and broadband Internet services offered by ILECs as "information services" and not telecommunications services subject to regulation under Title II of the Communications Act. The FCC's policy has also been to classify narrowband Internet...

  • Page 15
    ... of the cost of providing long distance service. The FCC has adopted policy changes that over time are reducing carriers' access rates. Under the FCC's November 2011 order, a uniform bill-and-keep framework for both intrastate and interstate access traffic will be the ultimate end state for all...

  • Page 16
    ...incumbent carrier must pay a USF contribution on its special access revenues, which these carriers as a matter of course pass through to the special access customer. This in turn increases our cost of purchasing special access service and using it as an input in providing broadband Internet services...

  • Page 17
    ... and termination services we provide to them. Under the FCC's November 2011 order, state commissions will have oversight of the intrastate access charge transition process to ensure that carriers comply with the FCC's timing and required reductions. States will continue to review intrastate switched...

  • Page 18
    ... carrier services. We are required to obtain street use and construction permits and licenses or franchises to install and expand our fiber optic network using municipal rights-of-way. In some municipalities where we have installed network equipment, we are required to pay license or franchise fees...

  • Page 19
    ... web site is not meant to be incorporated by reference into this Annual Report on Form 10-K. We also provide a copy of our Annual Report on Form 10-K via mail, at no cost, upon receipt of a written request to the following address: Investor Relations EarthLink, Inc. 1375 Peachtree Street Atlanta, GA...

  • Page 20
    ... sales and support personnel. Finally, as we increase sales efforts through indirect channel partners, we are more reliant on third parties and have less control over the sales process for our products and services. If we are not successful in developing the optimal sales model or hiring, training...

  • Page 21
    ... acquire, include diversion of management's attention and resources that would otherwise be available for the current operation of our business; failure to fully achieve expected synergies and costs savings; higher integration costs than anticipated; the impact on employee morale and the retention...

  • Page 22
    ... order to better meet the needs of the IT services market, which resulted in a reduction in our sales workforce and some office closings. We decided to exit telecom systems sales early in 2013 to enable focus on our hosted VoIP platform for new voice customers, which also resulted in a small number...

  • Page 23
    ...and expand their communications and network infrastructures more quickly, to adapt more swiftly to new or emerging technologies and changes in customer requirements, to increase prices that we pay for wholesale inputs to our services and to devote greater resources to the marketing and sale of their...

  • Page 24
    ... actions include removal of local switching and other network elements from the list of elements that the incumbent carriers must provide on an unbundled basis at TELRIC cost-based rates, as well as the grant of broad pricing flexibility to incumbents for their special access services in many areas...

  • Page 25
    ...distance voice minutes and FCC and state regulations compelling a reduction of switched access and reciprocal compensation rates. In late 2011, the FCC adopted policy changes that over time are reducing carriers' access rates. In July 2012, we modified our applicable state access tariffs and billing...

  • Page 26
    ... , Verizon and Windstream; cable companies providing broadband access, including Charter Communications, Inc., Comcast, Cox Communications, Inc. and Time Warner Cable; local and regional ISPs; established online services companies, such as AOL and the Microsoft Network; free or value-priced ISPs...

  • Page 27
    ... to speed, and dial-up Internet access services no longer have a significant, if any, price advantage over certain broadband services. Most of the largest providers of broadband services, such as cable and telecommunications companies, control their own networks and offer a wider variety of services...

  • Page 28
    ... disputes in the past, the number has increased since our acquisitions of ITC^DeltaCom and One Communications. Certain of these claims are made by patent holding companies that are not operating companies. The alleging parties generally seek royalty payments for prior use as well as future royalty...

  • Page 29
    ...implementation of new service offerings, increased acquisition integration costs, service or billing interruptions and the diversion of development resources. Privacy concerns relating to our business could damage our reputation and deter current and potential users from using our services. Concerns...

  • Page 30
    ... damage our reputation and harm our operating results. Our success depends on our ability to provide reliable service. Our network, network operations centers, central offices, corporate headquarters and those of our third party service providers are vulnerable to damage or interruption from fires...

  • Page 31
    ... customer service and technical support, web hosting services, certain billing and collection services and E911 service for our VoIP services. Our Consumer Services segment relies primarily on one customer service and technical support vendor. We may have to increase the price we pay or find a new...

  • Page 32
    ... percent stockholders increase their interest. Due to this risk, we monitor our purchases of additional shares of our common stock. Since an "ownership change" also could result from a change in control of our company, with subsequent annual limitations on the use of our net operating losses, this...

  • Page 33
    ... expose us to the risk of securities class action lawsuits, which could result in substantial costs and divert management's attention and resources, which could adversely affect our business. Finally, volatility or a lack of positive performance in our stock price may adversely affect our ability to...

  • Page 34
    ... multiple sales offices in locations throughout the United States. We own an administrative office in Arab, Alabama. Data centers. We operate four data centers. We own a data center facility in Atlanta, Georgia and we lease data center facilities in Marlboro, Massachusetts; Rochester, New York; and...

  • Page 35
    ... of Equity Securities. Market Information Our common stock is traded on the NASDAQ Global Market under the symbol "ELNK." The following table sets forth the high and low sale prices for our common stock for the periods indicated, as reported by the NASDAQ Global Market. EarthLink, Inc. High Low...

  • Page 36
    ...common stock from time to time in compliance with the Securities and Exchange Commission's regulations and other legal requirements, and subject to market conditions and other factors. The Repurchase Program does not require EarthLink to acquire any specific number of shares and may be terminated at...

  • Page 37

  • Page 38
    ... Report on Form 10-K. Year Ended December 31, 2008 2009 2010 (1) 2011 (1) 2012 (in thousands, except per share amounts) Statement of operations data: Revenues Operating costs and expenses (2)(3) Income from operations Income from continuing operations (4) Loss from discontinued operations (5) Net...

  • Page 39

  • Page 40
    ..., we classified the municipal wireless broadband assets as held for sale and presented the municipal wireless broadband operations as discontinued operations for all periods presented. (6) Includes the carrying amount of ITC^DeltaCom's 10.5% senior secured notes due on April 1, 2016, EarthLink...

  • Page 41
    ...-added services to residential customers. We operate an extensive network including approximately 28,800 route miles of fiber, 90 metro fiber rings and enterprise-class data centers that provide IP coverage across more than 90 percent of the United States. Acquisitions During 2010 and early 2011, we...

  • Page 42
    ... of our business. We believe focusing on the customer relationship increases loyalty and reduces churn. We believe that our broad communications and IT services portfolio and blend of access technologies for connectivity are key differentiators that can help us build long-term customer relationships...

  • Page 43
    ..., corporate downsizing and tightened credit have had, and may continue to have, an adverse effect on our results of operations, including longer sales cycles and increased customer demands for price reductions in connection with contract renewals. Additionally, our consumer access services are...

  • Page 44
    ... services; usage fees; installation fees; termination fees; and equipment fees. Consolidated Results of Operations The following comparison of statement of operations data is affected by our acquisition of ITC^DeltaCom on December 8, 2010 and our acquisition of One Communications on April 1, 2011...

  • Page 45
    ... carriers; and (3) other services, which includes the sale of customer premises equipment and web hosting. Our IT services, which are included within our retail services, include data centers, virtualization, security, applications, premises-based solutions, managed solutions and support services...

  • Page 46
    ... value-priced narrowband access) and broadband access services (including high-speed access via DSL and cable and VoIP). Access service revenues consist of recurring monthly charges for narrowband and broadband access services; usage fees; installation fees; termination fees; and fees for equipment...

  • Page 47
    ... of telecommunications fees and network operations costs incurred to provide our Internet access services; fees paid to suppliers of our value-added services; fees paid to content providers for information provided on our online properties; and the cost of equipment sold to customers for use with...

  • Page 48
    ...sales and marketing, customer service, network operations, information technology, regulatory, billing and collections, corporate administration, and legal and accounting. Such costs include salaries and related employee costs (including stock-based compensation), outsourced labor, professional fees...

  • Page 49
    ... of ITC^DeltaCom on December 8, 2010, One Communications on April 1, 2011 and STS Telecom on March 2, 2011. (c) Increase in depreciation expense in 2011 primarily due to an increase in capital expenditures, including customer acquisition costs and costs to maintain and enhance our network. Decrease...

  • Page 50
    ... completed during 2010 and 2011. Partially offsetting the decrease was an increase in integration-related costs, as we incur costs to integrate operating support systems and networks. In January 2013, we restructured our sales organization in order to better meet the needs of the IT services market...

  • Page 51
    ...discounts; interest earned on our cash, cash equivalents and marketable securities; and other miscellaneous income and expense items. The increase in interest expense and other, net, during the year ended December 31, 2011 compared to the prior year was primarily due to the inclusion of ITC^DeltaCom...

  • Page 52
    ... fiber optic route miles (a) Colocations Voice and data switches 28,804 1,415 56 28,804 1,415 56 (a) As of December 31, 2011 and 2012 , includes 24,859 route miles owned or obtained through indefeasible rights to use (IRU) and 3,945 marketed and managed route miles. Business Services Operating...

  • Page 53
    ... including traditional voice, web hosting and lower-end, single site broadband services. The increase in Business Services revenues during the year ended December 31, 2012 compared to the prior year was primarily due the inclusion of revenues from One Communications beginning in April 2011; revenues...

  • Page 54
    ... non-payment. However, we have not been able to decrease Consumer Services operating expenses to the extent of our Consumer Services revenue declines. Liquidity and Capital Resources The following table sets forth summarized cash flow data for the years ended December 31, 2010, 2011 and 2012 : Year...

  • Page 55
    ... ended December 31, 2010, we used $192.3 million of net cash for our acquisition of ITC^DeltaCom. During the year ended December 31, 2011, we used $43.1 million of net cash for acquisitions, primarily due to our acquisitions of One Communications and STS Telecom. The overall increase in cash flows...

  • Page 56
    ... expenses in connection with completing our integration. In January 2013, we restructured our sales organization in order to better meet the needs of the IT services market and decided to exit telecom systems sales early in 2013 to focus on our hosted VoIP platform for new voice customers. We will...

  • Page 57
    ... commitment fees and borrowing costs under our senior secured revolving credit facility. (3) Purchase commitments represent non-cancellable contractual obligations for services and equipment; minimum commitments under network access agreements with several carriers; and non-cancellable contractual...

  • Page 58
    ... most closely related financial measure reported under GAAP for the years ended December 31, 2010, 2011 and 2012 : Year Ended December 31, 2010 2011 (in thousands) 2012 Net income Interest expense and other, net Income tax provision (benefit) Depreciation and amortization Stock-based compensation...

  • Page 59
    ... 31, 2010 2011 (in thousands) 2012 Net income Interest expense and other, net Income tax provision (benefit) Depreciation and amortization Stock-based compensation expense Impairment of intangible assets Restructuring, acquisition and integration-related costs Purchases of property and equipment...

  • Page 60
    ...customer dispute credit reserves contain uncertainties because they require management to make assumptions and apply judgment about the amount and timing of unknown billing errors and disputes. We have not made any material changes in the accounting methodology we use to record sales credit reserves...

  • Page 61
    ... services where we do not have facilities, and we use a number of different carriers to terminate our long distance calls. These costs are expensed as incurred. Experience indicates that the invoices that are received from other telecommunications providers are often subject to significant billing...

  • Page 62
    ...to the discount rate, the terminal value, future operating cash flows and the growth rate. We have not made any material changes in the accounting methodology used to evaluate impairment of goodwill during the last three years other than the adoption of the new guidance allowing the option to first...

  • Page 63
    ... year ended December 31, 2012, we recorded an $8.3 million charge to increase our reserves for regulatory audits, primarily an audit currently being conducted by the Universal Service Administrative Company on previous ITC^DeltaCom Universal Service Fund assessments and payments, because the amount...

  • Page 64
    ... incumbent carriers on acceptable terms, our ability to offer competitively priced local telephone services will be adversely affected; (13) that our operating performance will suffer if we are not offered competitive rates for the access services we need to provide our long distance services; (14...

  • Page 65
    ...including government agency and notes, corporate debt securities, commercial paper, certificates of deposit and municipal bonds, all of which bear a minimum short-term rating of A1/P1 or a minimum long-term rating of A/A2. As of December 31, 2011 and 2012 , net unrealized losses in these investments...

  • Page 66
    ... Supplementary Data. EARTHLINK, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Reports of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2011 and 2012 Consolidated Statements of Comprehensive Income for the years ended December 31, 2010, 2011 and 2012...

  • Page 67
    ... December 31, 2012, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), EarthLink, Inc.'s internal control over financial reporting as of December 31, 2012, based on...

  • Page 68
    ... effective internal control over financial reporting as of December 31, 2012, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2011 and 2012, and the...

  • Page 69
    ... Marketable securities Restricted cash Accounts receivable, net of allowance of $7,323 and $7,872 as of December 31, 2011 and 2012, respectively Prepaid expenses Deferred income taxes, net Other current assets Total current assets Long-term marketable securities Property and equipment, net Long-term...

  • Page 70
    ...2010 2011 (in thousands, except per share data) 2012 Revenues Operating costs and expenses: Cost of revenues (exclusive of depreciation and amortization shown separately below) Selling, general and administrative...7,546 Net income per share Basic Diluted Weighted average common shares outstanding ...

  • Page 71
    ... to net share settlements of restricted stock units and stock options Dividends paid on shares outstanding and restricted stock units Dividends payable on restricted stock units Stock-based compensation expense Issuance of common stock in connection with acquisition of One Communications Return of...

  • Page 72
    ... in accounts payable and accrued and other liabilities (Decrease) increase in deferred revenue Net cash provided by operating activities Cash flows from investing activities: Purchase of businesses, net of cash acquired Purchases of property and equipment Purchases of marketable securities Sales and...

  • Page 73
    ...Internet access and related value-added services to residential customers. The Company operates an extensive network including approximately 28,800 route fiber miles, 90 metro fiber rings and four enterprise-class data centers that provide IP coverage across more than 90 percent of the United States...

  • Page 74
    ... Company's write-offs of uncollectible accounts were $4.1 million , $3.8 million and $8.0 million during the years ended December 31, 2010, 2011 and 2012 , respectively. Inventories Inventories consist of finished goods and are stated at the lower of cost or market value, using the first-in, first...

  • Page 75
    ... to its Business Services customers to the extent they are recoverable. Customer installation costs represent nonrecurring fees paid to other telecommunications carriers for services performed by the carriers when the Company orders last mile facilities in connection with new customers acquired by...

  • Page 76
    ... capacity to other telecommunications carriers; and (3) other services, which includes the sale of customer premises equipment and web hosting. Revenues generally consist of recurring monthly charges for such services; usage fees; installation fees; equipment fees; and termination fees. The Company...

  • Page 77
    of services, the Company defers the service activation and installation fee revenues and amortizes them over the 69

  • Page 78
    ...sales and marketing, customer service, network operations, information technology, regulatory, billing and collections, corporate administration, and legal and accounting. Such costs include salaries and related employee costs (including stock-based compensation), outsourced labor, professional fees...

  • Page 79
    ...the fair value of stock options using the Black-Scholes valuation model, and determines the fair value of restricted stock units based on the quoted closing price of EarthLink's common stock on the date of grant. Such value is recognized as expense over the requisite service period, net of estimated...

  • Page 80
    Year Ended December 31, 2010 2011 (in thousands) 2012 Interest expense Interest income Other, net Interest expense and other, net 71 $ $ 29,692 $ (5,390) (893) 23,409 $ 74,949 $ (4,678) 369 70,640 $ 64,331 (2,076) 1,161 63,416

  • Page 81
    ... share represents net income divided by the weighted average number of common shares outstanding during the reported period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, including stock options, restricted stock...

  • Page 82
    72

  • Page 83
    ...ITC^DeltaCom in a merger transaction with ITC^DeltaCom surviving as a wholly-owned subsidiary of EarthLink. The primary reason for the acquisition was to enable the Company to transform its business from an Internet services provider ("ISP") to residential customers into a network and communications...

  • Page 84

  • Page 85
    ...$ $ 251,489 2,275 253,764 In connection with the merger, each ITC^DeltaCom stock option was canceled in exchange for cash equal to the difference between the merger consideration and the exercise price, and certain ITC^DeltaCom restricted stock units were canceled in exchange for cash equal to the...

  • Page 86
    ... States. EarthLink acquired 100% of One Communications in a merger transaction with One Communications surviving as a wholly-owned subsidiary of EarthLink. The primary reason for the acquisition was to further transform the Company into a network and communications provider for business customers...

  • Page 87
    ... 2, 2011, EarthLink acquired Saturn Telecommunication Services Inc. and affiliates ("STS Telecom"), a privately-held provider of IP communication and information technology services to small and medium-sized businesses primarily in Florida. STS Telecom operates a sophisticated Voice-over-Internet...

  • Page 88
    ... revenue and earnings assumes the acquisitions of ITC^DeltaCom and One Communications occurred on January 1, 2010: Year Ended December 31, 2010 (in thousands) 2011 Total revenues Net income (loss) 5. Restructuring, Acquisition and Integration-Related Costs $ 1,599,462 $ (70,173) 1,447,767 53...

  • Page 89
    ...following table summarizes activity for the liability balances associated with the 2007 Plan for the years ended December 31, 2010, 2011 and 2012 , including changes during the period attributable to costs incurred and charged to expense and costs paid or otherwise settled (in thousands): Balance as...

  • Page 90
    ... to EarthLink's acquisitions. Such costs include: 1) severance and retention costs; 2) transaction-related costs, which are direct costs incurred to effect a business combination, such as advisory, legal, accounting, valuation and other professional fees; 3) costs to settle postcombination stock...

  • Page 91
    ... consisted of the following as of December 31, 2011 and 2012 : As of December 31, 2011 As of December 31, 2012 (in thousands) Communications and fiber optic networks Computer equipment and software Land and buildings Leasehold improvements Office and other equipment Work in progress Property and...

  • Page 92
    ... The changes in the carrying amount of goodwill by operating segment during the year ended December 31, 2012 were as follows: Consumer Services Segment Business Services Segment (in thousands) Total Balance as of December 31, 2011 Goodwill Accumulated impairment loss $ 88,920 - 88,920 - $ 377...

  • Page 93
    ... the 2012 annual impairment test, which were Business Services and Consumer Services. Each of these reporting units constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results. The Company evaluates its reporting units...

  • Page 94
    ...1 of each year. The ITC^DeltaCom Notes will mature on April 1, 2016. Redemption. ITC^DeltaCom may redeem some or all of the ITC^DeltaCom Notes, at any time before April 1, 2013, at a redemption price equal to 100% of their principal amount plus a "make-whole" premium. ITC^DeltaCom may redeem some or...

  • Page 95
    ... to repay indebtedness under the ITC^DeltaCom Notes or other indebtedness secured on a first-priority basis or (b) reinvest the net sale proceeds in its business or (2) ITC^DeltaCom experiences a change of control, ITC^DeltaCom may be required to offer to purchase ITC^DeltaCom Notes from holders at...

  • Page 96
    ...in full. The Company paid $1.9 million of transaction fees related to the new senior secured revolving credit facility, which are being amortized to interest expense over the life of the credit facility using the effective interest method. Commitment fees and borrowing costs under this facility vary...

  • Page 97
    ... Company to acquire any specific number of shares and may be terminated by the Board of Directors at any time. The following table presents repurchases under the Company's share repurchase program for the years ended December 31, 2010, 2011 and 2012 : Year Ended December 31, 2010 2011 (in thousands...

  • Page 98
    ... 2010, 2011 and 2012 , respectively. The Company has classified stock-based compensation expense within selling, general and administrative expense, the same operating expense line item as cash compensation paid to employees. Stock Incentive Plans The Company has granted options and restricted stock...

  • Page 99
    ... 31, 2010 and 2011. The fair value of stock options granted during the year ended December 31, 2012 was estimated using the Black-Scholes option-pricing model with the following assumptions: Year Ended December 31, 2012 Dividend yield Expected volatility Risk-free interest rate Expected life...

  • Page 100
    ...ended December 31, 2010, 2011 and 2012 was $10.8 million , $15.6 million and $7.4 million , respectively, which represents the closing price of the Company's common stock on the vesting date multiplied by the number of restricted stock units that vested. 13. Profit Sharing Plans The Company sponsors...

  • Page 101
    ... ended December 31, 2010, 2011 and 2012 : Year Ended December 31, 2010 2011 (in thousands) 2012 Federal income tax provision at statutory rate State income taxes, net of federal benefit Nondeductible expenses Net change to valuation allowance Change in state tax rate Uncertain tax positions Other...

  • Page 102
    ...the extent the Company reports income in future periods, the Company intends to use its net operating loss carryforwards to the extent available to offset taxable income and reduce cash outflows for income taxes. The Company's ability to use its federal and state net operating loss carryforwards and...

  • Page 103
    ...as well as renewal options. Total rent expense (including operating expenses) during the years ended December 31, 2010, 2011 and 2012 for all operating leases, excluding rent and operating expenses associated with facilities exited as part of the Company's restructuring plans, was $4.5 million , $13...

  • Page 104
    ... of 2012, the Company recorded an $8.3 million charge as cost of revenue to increase its reserves for regulatory audits, primarily an audit currently being conducted by the Universal Service Administrative Company on previous ITC^DeltaCom Universal Service Fund assessments and payments, because...

  • Page 105

  • Page 106
    ... STATEMENTS - (Continued) past, the number has increased since the acquisitions of ITC^DeltaCom and One Communications. Certain of these claims are made by patent holding companies that are not operating companies. The alleging parties generally seek royalty payments for prior use as well as future...

  • Page 107
    ...to assist in obtaining fair-value pricing for its Level 2 securities. Where observable market data is available, the pricing service will use a weighted average price from a variety of data providers. Where observable market data is not readily available, the pricing service will use a pricing model...

  • Page 108
    ...the same lines that its chief executive officer reviews its operating results in assessing performance and allocating resources. The Company operates two reportable segments, Business Services and Consumer Services. The Company's Business Services segment provides a broad range of data, voice and IT...

  • Page 109
    ... STATEMENTS - (Continued) Information on reportable segments and a reconciliation to consolidated income from operations for the years ended December 31, 2010, 2011 and 2012 is as follows: Year Ended December 31, 2010 2011 (in thousands) 2012 Business Services Revenues Cost of revenues (excluding...

  • Page 110
    ... services, which includes data, voice and managed IT services provided to business customers; (2) wholesale services, which includes the sale of transmission capacity to other telecommunications carriers; and (3) other services, which includes the sale of customer premises equipment and web hosting...

  • Page 111
    ... securities Restricted cash Accounts receivable, net Prepaid expenses Deferred income taxes, net Due from affiliates Other current assets Total current assets Long-term marketable securities Property and equipment, net Long-term deferred income taxes, net Goodwill Purchased intangible assets, net...

  • Page 112
    ... securities Restricted cash Accounts receivable, net Prepaid expenses Deferred income taxes, net Due from affiliates Other current assets Total current assets Long-term marketable securities Property and equipment, net Long-term deferred income taxes, net Goodwill Purchased intangible assets, net...

  • Page 113
    ... Ended December 31, 2011 Guarantor Subsidiaries Non-Guarantor Subsidiaries Parent Eliminations Consolidated Revenues $ Operating costs and expenses: Cost of revenues (exclusive of depreciation and amortization shown separately below) Selling, general and administrative (exclusive of depreciation...

  • Page 114
    ... administrative (exclusive of depreciation and amortization shown separately below) Depreciation and amortization Restructuring, acquisition and integration-related costs Impairment of intangible assets Total operating costs and expenses Income (loss) from operations Interest expense and other, net...

  • Page 115
    ... from operating activities $ Cash flows from investing activities: Purchases of property and equipment Purchases of investments in marketable securities Sales and maturities of investments in marketable securities Payment for investment in subsidiary stock Change in restricted cash Net cash used in...

  • Page 116
    ... flows from operating activities Cash flows from investing activities: Purchase of businesses, net of cash acquired Purchases of property and equipment Purchases of marketable securities Sales and maturities of investments in marketable securities Payment for investment in subsidiary stock Change in...

  • Page 117
    ... from operating activities $ Cash flows from investing activities: Purchase of business, net of cash acquired Purchases of property and equipment Purchases of investments in marketable securities Sales and maturities of investments in marketable securities Payments to settle precombination stock...

  • Page 118
    ... Mar. 31, 2012 June 30, 2012 Sept. 30, 2012 Dec. 31, 2012 (unaudited) (in thousands, except per share data) Revenues $ 243,018 $ 363,559 $ 357,290 $ 350,237 $ 344,376 Cost of revenues 103,723 164,357 161,327 161,079 159,337 Income from operations 39,950 29,268 31,603 24,288 26,195 Net income (loss...

  • Page 119
    ... filed or submitted under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer...

  • Page 120
    ... table sets forth information as of December 31, 2012 concerning the shares of our common stock which are authorized for issuance under our equity compensation plans: Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (b) Number of Securities Remaining Available for Future...

  • Page 121
    convert these restricted stock units into EarthLink restricted stock units. The number of 108

  • Page 122
    ...(c). In connection with the closing, the Leadership and Compensation Committee approved the EarthLink, Inc. Stock Option Plan for Inducement Awards Relating to the Acquisition of New Edge Holding Company. The Leadership and Compensation Committee then granted options to purchase 657,000 shares of...

  • Page 123
    ... Merger Corp. and ITC^DeltaCom, Inc. (incorporated by reference to Exhibit 2.1 of EarthLink, Inc.'s Report on Form 8-K dated October 1, 2010-File No. 001-15605). Agreement and Plan of Merger, dated as of December 20, 2010, by and among EarthLink, Inc., Egypt Acquisition Corp., One Communications...

  • Page 124
    ...by reference to Exhibit 10.19 of EarthLink, Inc.'s Report on Form 10-K for the year ended December 31, 2009-File No. 001-15605). Form of Award Agreement under EarthLink, Inc. Stock Option Plan for Inducement Awards Relating to the Acquisition of New Edge Holding Company (incorporated by reference to...

  • Page 125
    ... to Exhibit 10.1 of EarthLink, Inc.'s Report on Form 10-Q for the quarterly period ended September 30, 2012-File No. 00115605). High-Speed Service Agreement between EarthLink, Inc. and Time Warner Cable Inc. (incorporated by reference to Exhibit 10.5 of EarthLink, Inc.'s Report on Form 10-Q for...

  • Page 126
    ...as amended, is deemed not filed for purposes of section 18 of the Securities and Exchanges Act of 1934, as amended, and otherwise is not subject to liability under these sections. (b) Exhibits The response to this portion of Item 15 is submitted as a separate section of this Annual Report on Form 10...

  • Page 127
    ... any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants to such attorneys-in-fact and agents full power and authority to do and...

  • Page 128
    ... EarthLink Business, LLC) EarthLink Carrier, LLC (DE)(fka Interstate FiberNet, Inc.) EarthLink Managed Services, LLC (SC)(fka Business Vitals, LLC) EarthLink Shared Services, LLC (DE)(fka One Communications Management Co.) ITC^DeltaCom, Inc. (DE) Lightship Telecom, LLC (DE) Partner Consulting, LLC...

  • Page 129
    ... 20, 2013, with respect to the consolidated financial statements of EarthLink, Inc. and the effectiveness of internal control over financial reporting of EarthLink, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 2012. /s/ Ernst & Young LLP Atlanta, Georgia February...

  • Page 130
    ...P. Huff, certify that: 1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2012 of EarthLink, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in...

  • Page 131
    ..., certify that: 1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2012 of EarthLink, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light...

  • Page 132
    ...-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of EarthLink, Inc. (the "Company") for the year ended December 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Rolla P. Huff, Chief Executive Officer of the Company, certify...

  • Page 133
    ...-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of EarthLink, Inc. (the "Company") for the year ended December 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Bradley A. Ferguson, Chief Financial Officer of the Company, certify...